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Chapter 1 – Accounting The Link Between Business and Accounting
Chapter 1 – Accounting
The Link Between Business and Accounting
Learning Objectives
Define accounting, why important?Users of accountingFinancial Statement standardsFour Financial StatementsAnalysis!Risks! How to Control!
Let’s talk about Apples…
No, Not that kind…..
Apple Computer!
How do they do it?
The Operating Cycle for Apple…
Accounting is the process of
Identifying Measuring and Communicating
Financial Information to various users, both inside and outside of the company
Much of this information is communicated with Financial Statements
The Basic Financial Statements
Balance Sheet Income Statement Statement of Changes in Owners’ Equity Statement of Cash FlowsThe Financial Statements are based on a
broad set of guidelines called Generally Accepted Accounting Principles (GAAP)
Setting the Guidelines for Financial Reporting
Internal Users use Managerial Accounting Statements
Who are the internal users?What information do they look for??
External Users use Financial Accounting
Who are the external users?What information do they look for??
Business—what type? Dim sum!
An EXERCISE. . .
The Balance Sheet
Describes the financial position of a company at a specific point in time
Three Components of the Balance SheetAssetsLiabilitiesOwners’ Equity
Assets
Things of Value, resourcesOwned by the CompanyAs a result of past transactionsWill be used to generate future revenues
Liabilities
Amounts the business owes to creditorsClaims against the Assets
Owners’ Equity
Amounts the business owes to its owners
Residual claim against the Assets After the creditors’ claims have been
satisfied
Assets - Liabilities = Owners’ Equity
Want more Equity?
You’ll need to…..
Invest More – Increases the Contributed Capital portion of Equity
Earn More – Running a successful business increases the Retained Earnings portion of Equity
The Accounting Equation
Assets = Liabilities + Owners’ Equity
States that all of the assets of the business are claimed by the creditors and/or the owners
This is where the Algebra comes in
Apple’s Balance Sheet
The Accounting Equation
Is also called the Balance Sheet Equation
The Balance Sheet
Total Assets of $8,050
$2,974 of the Assets are claimed by the creditors
$5,076 of the Assets are claimed by the shareholders
The owners invested $2,514M
And the investment has grown to $5,076M
Think of it as an investment….
But the Balance Sheet doesn’t tell the whole story….
The Balance Sheet describes what we have
But not how we got it!
Introducing…..The Income Statement
What do you think THIS statement is?
The Income Statement tells how the company’s performance changed the net assets….
Revenues are transactions which resulted in an inflow of net assets
Expenses are transactions which resulted in an outflow of net assets
Revenues
The Amount Earned from Sales or Services
During the time period described at the top of the Income Statement
Expenses
The Costs incurred to generate Revenues
During the time period described at the top of the Income Statement
The Bottom Line
If Revenues Exceed Expenses in the current period, it’s called “Net Income”
If Expenses Exceed Revenues in the current period, it’s called “Net Loss”
Think of it as a Business Sink!
Net Income means that Assets are flowing into the Business (Revenues)
Faster than they’re flowing out of the business (Expenses)
The Asset Level in the Sink is Rising!
Net Loss
Net Loss means that the assets are flowing out of the business (Expenses)
Faster than they’re flowing into the business (Revenues)
The Asset Level in the Sink is Dropping!
To Whom do these new Assets belong?
To the Stockholders!
Their Claim against the assets of the Corporation has increased by $276 Million
These assets will be retained by the corporation until they are returned to the stockholders as dividends
This can be seen on the Statement of Retained Earnings
The “Bottom Line”
from the Income
Statement
Is transferred to the Statement of
Retained Earnings
Similarly…..
The Ending Retained Earnings
balance from the
Statement of R/E
Is transferred to the Balance Sheet
The Statement of Cash Flows
Takes a more limited, but very important look, at a single asset…
Cash!
The Statement of Cash Flows
Categorizes Cash Inflows and Outflows during a specific period of time into three categories:
Operating
Investing
Financing
Operating Activities
Cash Receipts and Cash Disbursements
As a result of day-to-day operation of the business
Investing Activities
Cash Receipts and Cash Disbursements
From the purchases and sales of long-term assets
Financing Activities
Cash Receipts and Cash Disbursements
From the company’s funding sources – its long-term creditors and stockholders
Cash collected from the issuance of stock or long-term liabilities
Cash dividends paid, or payments to retire long-term debt
Statement of Cash Flows
Financial Statement Analysis
Is the process of analyzing the information in the four financial statements and the notes to the financial statements
To evaluate past performance and
Predict future performance
Risk and Rewards
Every business takes risks.
It is important to be able to identify and evaluate the risks
Controls must be implemented to minimize the risks and
Improve the opportunity for rewards
End – Chapter 1
The Process of ….
Getting Cash
Using Cash to purchase inputs
Changing those inputs into products or services, and
Providing the product or service to customers and eventually getting cash back
Is Called an Operating Cycle
Managerial Accounting is concerned with satisfying the needs of internal users
Internal Users
Managers Sales and MarketingInternal AuditorsProduction
Supervisors
Financial Accounting is concerned with satisfying the needs of External Users
External Users
Government CreditorsPotential
Investors
Vendors,
Customers
and Employees
If you’ve ever applied for a loan…
You’ve already prepared a Balance Sheet!
The bank asks you for a listing of all of your assets
And a listing of all of your liabilities
The difference between these amounts is your net worth, or Equity!
Your Personal Balance Sheet
Examples of Assets
Cash
Short-Term Investments
Accounts Receivable
Supplies
Land
Equipment
Examples of Liabilities
Accounts Payable
Wages Payable
Notes Payable
Stockholders’ Equity
The claims by the stockholders result from
Contributed Capital – assets stockholders contributed in exchange for shares of stock
Retained Earnings – cumulative profitability of the corporation in excess of dividends
